Incidents: On October 28, 2023, Xinhua Co., Ltd. released its three-quarter report for 2023. The company's operating income for the first three quarters of 2023 was 1,903 billion yuan, down 5.72% year on year; net profit was 204 million yuan, down 17.66% year on year; net profit after deduction was 195 million yuan, down 15.30% year on year. The corresponding company's 3Q23 operating income was 646 million yuan, up 8.46% month on month; net profit was 66 million yuan, up 11.37% month on month.

In 3Q23, the company's profitability improved month-on-month. The average prices of the company's fatty amines, organic solvents, and flavors in the first three quarters of 2023 were 12280.77/7799.04/34454.50 yuan/ton, respectively, with a year-on-year change of -11.36%/-4.02%/-2.52%, respectively. The company's overall gross sales margin for the first three quarters was 24.61%, up 0.83 pcts from the same period last year. The company's financial expenses for the first three quarters increased 120.16% year on year; sales expenses increased 10.33% year on year; R&D expenses decreased 7.69% year on year; and management expenses increased 14.86% year on year.

The company's net profit for the first three quarters of 2023 fell year on year. The net profit margin for the first three quarters of 2023 was 12.19%, a decrease of 1.68pcts from the same period last year. We believe that the company's performance in the first three quarters of 2023 is under pressure, mainly due to lower prices of its main products. The company's 3Q23 revenue and net profit improved month-on-month. We think the main reason is that product prices rebounded in the third quarter.

The company's cash flow situation is good. The net cash flow from the company's operating activities in the first three quarters of 2023 was 235 million yuan, a year-on-year decrease of 12.25%. Net cash flow from investing activities was -033 million yuan, up 91.83% year on year. Net cash flow from fund-raising activities was -103 million yuan, a year-on-year decrease of 160.89%.

The balance of cash and cash equivalents at the end of the period was $780 million, up 71.70% year on year. Accounts receivable fell 0.32% year over year, and the turnover ratio of accounts receivable fell, from 8.13 in the same period in 2022 to 7.45.

Inventories fell 6.88% year on year, and inventory turnover declined from 4.94 times in the same period in 2022 to 4.89 times.

The company specializes in fine chemical products, and various categories have advantages. The company is mainly engaged in the production and operation of fatty amines, organic solvents, fragrance essences, hydrogen peroxide and other fine chemical products. The equipment scale and process technology of the products have strong competitive advantages in China. Currently, products such as isopropylamine and isopropyl alcohol have received high recognition in domestic and foreign markets, and occupy a very important market position. The company has formed diversified, large-scale, low-carbon amine series, organic solvent series, synthetic fragrance series and other products with high technological content and advanced process technology, which are widely used in pesticides, pharmaceuticals, inks, new energy, coatings, mineral flotation, extraction and other fields. The company focuses on scientific and technological innovation, helps the main business continue to develop, accelerates the transformation of scientific and technological innovation achievements, forms a number of high-end core technologies with independent intellectual property rights, and plans the second growth curve of Xinhua shares.

The company's comprehensive production capacity of low-carb amines ranks among the highest in China. Aliphatic amines are important synthetic raw materials for many chemical products. They are widely used in downstream industries such as pesticides, pharmaceuticals, coatings, dyes, catalysts, curing agents, new energy materials, cosmetics, food additives, chemical fertilizer retardants, and preservatives. The company's comprehensive production capacity of aliphatic amines ranks among the highest in China and ranks among global low-carb amine product manufacturers. The company's fatty amine products are mainly isopropylamine series, ethylamine series, n-propylamine series, n-butylamine series, etc., all of which are low-carbon fatty amines. The company's low-carb amine products have strong competitive advantages in terms of production scale, cost, and market share. Furthermore, after years of development, the isopropylamine industry has a mature market and stable production demand. According to the company's 2022 annual report, China is the world's main producer of isopropylamine, accounting for about 78% of production capacity, and is also a major exporter of isopropylamine. According to the company's 2023 semi-annual report, the company currently has the largest isopropylamine production capacity in China. It was selected as the third batch of individual champion products in the manufacturing industry by the Ministry of Industry and Information Technology, with an advantage in market share.

The company's organic solvent dual process has cost advantages. The main product of the company's organic solvent series is isopropyl alcohol, which is mainly used in pharmaceutical intermediates, pesticides, electronic cleaning, inks and coatings. According to the company's 2022 annual report, the company has 2 sets of isopropyl alcohol production units, 100,000 tons/year acetone method hydrogenation to produce isopropyl alcohol as a by-product of isopropyl amine, and 50,000 tons/year of direct hydration of propylene to produce isopropyl alcohol. As of 2022, the company is the only large-scale manufacturer in China that has implemented the two processes of acetone hydrogenation method and propylene hydrogenation method. Its acetone hydrogenation method is the first in China. The propylene hydrogenation method was developed using patented technology from the Dalian Chemical Institute of the Chinese Academy of Sciences and continuous improvement. According to the company's 2022 annual report, the domestic isopropyl alcohol production capacity exceeds one million tons, the vast majority of which are acetone processes, and the parallel operation of the company's two processes allows it to select raw materials with cost advantages between different raw materials for production, maintaining a certain cost advantage in market competition. Domestic isopropyl alcohol supply is growing faster than demand, causing the production capacity of the isopropyl alcohol industry to enter a period of excess capacity. We believe that the company has mastered the two process routes, the acetone hydrogenation method and the propylene water method. The switch between the two process routes brings cost advantages, giving the enterprise greater competitiveness in the context of overall oversupply in the industry.

The company's flavor and fragrance business is developing steadily. In recent years, with the rapid development of China's economy, the scale of downstream industries such as the daily chemical industry, food industry, and pharmaceutical industry, etc., has continued to expand, and China's fragrance industry has also shown a continuous and stable development trend as a supporting industry. At the same time, the improvement of residents' living standards and the upgrading of the consumption structure have also provided broad market space for the development of the industry. Fragrances are closely related to the national economy, there is no obvious cyclicality, and with the improvement of living standards, the industry is expected to continue to grow. It is a growing industry. The company's fragrance products include bio-based fragrances and fully synthetic fragrances. After years of development, the company has a certain production scale and comprehensive strength in the synthetic fragrance industry. The company and Givaudan, Switzerland, the world's largest fragrance company, jointly established Xinrui Fragrance, a fragrance manufacturer, with a production capacity of 16,000 tons/year for fragrance products. Xinrui Fragrance can make full use of the technology and production experience of both partners for installation construction and production. About 75% of the products produced are supplied to Givaudan, providing a strong guarantee for the company's stable production and marketing sales. In addition, the company has built a 7,4650 tons/year synthetic fragrance product base project at the Ningdong Energy and Chemical Base in Ningxia, which can increase the variety of fragrance products, expand the production capacity of fragrance products, and consolidate the competitiveness of the company's original products, thus further enhancing the company's position in the fragrance industry.

The company's various product lines have significant competitive advantages. In terms of customer service, the company has a complete range of aliphatic amine products, which basically cover the fatty amine C2-C4 series, which can provide customers with a more comprehensive range of amine products. In particular, there are many fatty amine products required by agrochemical enterprise customers. The company can provide customers with various low-carbon fatty amine combinations to provide customers with high-quality one-stop product services. A complete range of products is conducive to improving the company's comprehensive service capabilities, increasing customer stickiness, enhancing the company's attractiveness to major customers, reducing the customer's sensitivity to purchasing prices, and raising the company's gross margin level. In terms of technology research and development, the company has made a breakthrough in lithium extraction technology. Relying on the technical team's long-term R&D investment in ionic liquid extractants, the company has achieved breakthrough progress in precious metals, heavy metal treatment, and mineral flotation to achieve integrated solutions for mineral resource recycling. Its disruptive lithium extraction technology has great prospects in the salt lake lithium extraction, ore lithium extraction, and lithium battery recycling industries. In terms of production costs, the company's scale effect is obvious, and it has an advantage in cost control.

The company has a large production capacity and a certain bargaining power for the procurement of raw materials. For example, acetone, the company has mostly signed annual contracts with major acetone producers and enjoys preferential contract prices. The lower procurement price of bulk raw materials is conducive to raising the company's gross margin level and enhancing its market competitiveness.

A breakthrough was made in the field of lithium extraction in salt lakes, and the project was successfully put into operation. The company's salt lake lithium extraction team has made major breakthroughs in the fields of lithium resource extraction and recycling. According to the company's 2022 annual report, the company's extraction technology and products have been successfully applied to the Zangge mining lithium deposition mother liquor recovery device. According to the company's 2023 semi-annual report, the company signed a test project for the efficient separation (extraction method) of lithium mother liquor from Salt Lake Co., Ltd. and Lanke Lithium, and the project was successfully put into operation in early July 2023. In the future, the company is expected to continue to promote new technologies and applications to major domestic salt lakes, mines and lithium battery recycling industries. We believe that the company's new energy industry layout is expected to continue to advance.

Invest in waste electrode and battery resource recycling projects to expand the lithium battery industry chain. In order to further enhance the company's position in the industry and expand upstream and downstream industries, Zhejiang Xinyao Recycling Technology Co., Ltd., a holding subsidiary of the company, plans to invest 600 million yuan to build waste electrode and battery resource recycling projects, including production facilities, auxiliary production equipment and service facilities. The project is being constructed in two phases. The first phase of the project is 10,000 tons of waste battery LFP electrodes. The construction period is estimated to be 12 months; the second phase of the project is 40,000 tons of waste battery LFP black powder, and the construction period is expected to be 18 months. The project is conducive to strengthening the company's service capabilities in the field of lithium battery recycling and promoting the expansion of the company's industrial chain. In addition, the company reached a cooperation agreement with Yaoning Technology, and the two sides jointly funded the construction of a 10,000 ton/year waste lithium recycling production line; the company signed a product sales contract with Grimmie, and the extractant was successfully applied to Grimmie's battery recycling production line. We believe that the company's layout in the lithium battery recycling sector is expected to create new business growth points for the company and enhance the company's profitability and overall competitiveness.

Investment suggestions: The company is expected to achieve operating income of 25.82/32.46/3,921 billion yuan in 2023-2025, and net profit of 2.75/3.93/520 billion yuan respectively, corresponding EPS of 1.48/2.12/2.80, respectively. The PE multiples corresponding to the current stock price are 23.0X, 16.1X, and 12.2X respectively. Based on the following aspects, 1) With macroeconomic stabilization and downstream demand recovery, the price and sales volume of the company's main product lines such as fatty amines, organic solvents, and fragrance essences are expected to rise, which is beneficial to performance restoration; 2) The salt lake lithium extraction team of the company's research institute has made major breakthroughs in lithium resource extraction and recycling, and the company is expected to promote new technologies and applications to various domestic salt lakes, mines and lithium battery recycling industries, which is expected to further open up market space in the field of new energy; 3) The company invests in waste chips and battery resource recycling projects to expand upstream and downstream industries. company New business growth points to enhance the company's profitability and overall competitiveness. We are optimistic about the recovery in downstream demand and the company's lithium battery sector layout, cover it for the first time, and give it a “buy” rating.

Risk warning: risk of absorption of new production capacity; risk of fluctuations in raw material and energy prices; environmental compliance risk; risk of overseas sales; risk of overseas sales, risk of projects under construction falling short of expectations, etc.